#67 Friendly reminder

Last week’s enforcement actions by the SEC against Coinbase and Binance should surprise no one. Binance has been under siege in word and action for quite a while, and Coinbase even received the Wells notice that is used to precede legal actions.

Enforcement was broadly priced in. This attempt from US regulators to make two of the biggest exchanges crumble was met with general indifference by the markets. This is a reminder that the holders that remain in crypto are mostly faithful believers, long-term thinkers, diamond hands, or lost wallets. Some interpret it as a bottom signal since not even the perspective of Binance closing scares the markets. Probably crypto can still go lower, but something more surprising would have to happen to change the community’s mind.

Crypto is going through a tough time; there’s no denying that. But most of the issues it’s going through were expected and have a known alternative. Regulation would always be a huge pain point for crypto, but the answer was always known: fight the legal fight, keep building, and move to greener pastures.

Today’s INTERPOLATION represents an undisturbed cryptopian, keeping up with stuff even under water.

In today’s issue of Carbono Insights

• The SEC sues Binance in a friendly reminder that you cannot escape the past. The SEC also adds a little spice to the lawsuit by trying to slip in a definition of some cryptos as securities.
• The SEC sues Coinbase, and the exchange reminds the SEC that they cannot comply with unclear regulations.
• The US Senate shares a draft bill that could illuminate the security/commodity dilemma.
• a16z, one of the biggest VCs in the world, opens shop in the UK to escape from the regulatory mess in the US.
• Arbritrum’s lack of decentralization brings the L2 to a temporary halt
• We explain what a code audit looks like.

1. Regulation | SEC Vs Binance

The SEC’s lawsuits against Binance and Coinbase differ in nature and content. Binance’s suit is broader and sounds better founded. The world’s number one exchange has probably gone to extreme lengths to become a clean and compliant business in the last few years, but it’s well-known that its origins are full of grey areas. Some of them have emerged in the form of incriminating internal conversations (”we are operating as a fking unlicensed securities exchange in the USA”), and some come as suspicious corporate interrelations.

The list of accusations is long. Some reveal simple (alleged) criminal acts, but others are testing the limits of the current regulatory framework.

• Running an unregistered exchange, broker, and clearing agency in the US. The “unregistered” part is confusing because crypto companies will tell you that registering in the SEC is virtually impossible for lack of clarity and nuance.
• Deliberately evading KYC measures for high-profile US customers. Binance will have a hard time denying this; in this case, the regulation was precise.
• Trading securities. This is one of the most deceptive statements. Most accusations apply to Binance as a centralized exchange. Still, suppose the SEC establishes in court that ADA, MATIC, ATOM, Filecoin, and a few others are securities, as they claim. In that case, the lawsuit will become a strong precedent for hundreds of decentralized protocols.
• Commingling funds. It’s a powerful word after it became the core accusation against SBF and his crew. According to the SEC, Binance’s CZ took customer funds and used them without their permission to enrich himself. That’s no-no in any context, regardless of the technology or jurisdiction.

2. Regulation II | SEC Vs Coinbase

The SEC also sued Coinbase in last week’s enforcement spree. Coinbase’s case differs significantly from Binance’s. Gensler and company accuse Coinbase of operating an unregistered broker, securities exchange, and clearing agency, and while they’re at it, tag a bunch of tokens as securities.

The SEC’s case against Coinbase is weaker since Coinbase has a cleaner history and, if they’ve ever deliberately challenged the limits of regulation, at least they haven’t left a written record of it.

Coinbase yielded their known defense: “We would love to register, but it’s impossible. Plus, you and your cousin, the CFTC, should talk because you’re confusing us.“

In the meantime, Coinbase’s defense got a boost when the US Court of Appeals ruled in their favor and ordered the SEC to clarify its position on a rulemaking petition from the exchange. It’s a separate legal case where Coinbase is who’s demanding action from the regulator.

This is a friendly reminder that the enforcement battle can only improve the industry by bringing clarity (Coinbase) or purging the alleged worst practices, like the commingling of funds, if proven (Binance).

3. Regulation III | US Senate draft crypto bill

But there’s regulatory hope for crypto. It takes the shape of a draft proposed by the chairmen of two relevant committees: Patrick McHenry, chair of the financial panel, and Glenn “GT” Thompson, chair of the agriculture committee. Their crypto bill draft is in the earliest stages and has only been published to start a conversation. Still, it’s already introducing some much-needed clarity, and some attention to the nuances crypto brings about.

The most exciting proposition is their take on the security/commodity debate. According to the McHenry-Thompson draft, cryptocurrencies can be both throughout their lifecycle. It depends on how they’re issued, who holds them, etcetera. The dual nature of the token comes with dual supervision: SEC and CFTC would need to cooperate because they could both be involved in regulation and enforcement.

This thread is an excellent explainer.

4. Decentralization| Arbitrum’s temporary malfunction

Layer 2 Arbitrum failed to process transactions on the Ethereum blockchain for a few hours last Wednesday. Layer 2s are scalability solutions for Layer 1s (in this case, Ethereum), which consist of independent blockchains that process transactions independently, group them in bundles, and then verify those bundles on the mainnet. This way, they manage to turn a bunch of transactions into one single operation on the Layer 1, saving lots in fees.

Layer 2s are Ethereum’s preferred solution for scalability, and Arbitrum has been the leading Layer 2 for a while. But last week’s hiccup is a friendly reminder that the decentralization of Layer 2s is still unfinished business. The transaction failure was due to a bug in Arbitrum’s sequencer. Broadly speaking, the sequencer is L2’s equivalent of a node, and so far, rollups have single or few sequencers processing transactions. Such a level of centralization has proven to be risky once again.

5. Regulation | A16Z looks for a home outside the US

Andreessen Horowitz is opening a branch in the UK, searching for a clearer regulatory context for them to implement their vision of expanding Web 3 technologies. a16z has over $7.3B in assets under management deployed (or ready to be deployed) in what they believe is the foundation of the third era of the internet: crypto.

Friendly reminder that crypto is digital and global and can easily find a place to do business.

Source: Twitter

6. Security | What does a code audit look like?

What does a code audit look like?

Today we show you a peek into the insides of a professional code audit, shared by our sponsor, Audita.

Code audits are security reviews performed by qualified security specialists that look for vulnerabilities in smart contracts that can lead to malfunctions or hacks. These reviews need to be carried out by independent developers who identify flaws in the code of different types, suggest how to fix them, and usually follow up on the execution. Audit reports list such defects, classified according to their severity.